What Every Nonprofit Should Know About Donor Acknowledgment Letters
Each year, approximately $300B is donated to nonprofit organizations in the United States. Since these contributions can be taken as deductions on individual tax returns, it is no wonder that the IRS has enacted some reporting standards for the acknowledgment of these contributions. There are different requirements for what must be provided to a donor and/or filed with the IRS based on the value of the transaction, types of goods that were donated, and any additional components of the exchange.
A contemporaneous written acknowledgment refers to documentation sent from the donee organization to a donor which must contain the following:
- The name of the organization
- The amount of any cash contributions
- The date the contribution was received
- A description of any noncash contributions. Do not include the fair market value of noncash contributions.
- A statement declaring no goods or services were provided or, alternatively, if goods or services were provided, the value and a description of the goods or services
While the items above are required, written acknowledgments also provide an opportunity for an organization to tell their story. The organization may want to highlight their mission statement, give updates on their organization, and provide information on upcoming events. Adding a personal touch, such as a unique logo, can help an organization stand out and receive future donations.
If a cash donation is under $250 and no goods or services were part of the exchange, then no acknowledgment is required to be given to the donor. For a cash donation of $250 or more, a contemporaneous written acknowledgment must be given to any donor that requests it, and an acknowledgment is necessary if the donor wishes to take a deduction on their federal income tax return. The responsibility to obtain the acknowledgment lies with the donor and there is no penalty for a nonprofit organization that does not provide one. However, it is still a good practice to regularly provide acknowledgment s to donors for donations of any amount.
The requirements for noncash donations are similar to cash donations if the donation is $5,000 or less. Things get a bit more complicated when a noncash donation exceeds $5,000. If this is the case, the donor must file Form 8283 along with their federal income tax return and obtain a qualified appraisal of the item that they are donating. It is the responsibility of the nonprofit donee organization to sign Part IV of Section B of Form 8283, which states:
- The organization is qualified under IRC Sec. 170(c)
- The organization has received the donated property
- The organization will file Form 8282 if the property is sold or disposed of within three years
Quid Pro Quo
A quid pro quo contribution is when goods or services are provided in exchange for the contribution. This makes the transaction part payment and part contribution. For example, purchasing a ticket to a nonprofit’s fundraising event can be considered a quid pro quo contribution. The threshold for an acknowledgment is lowered to $75 and the following additional disclosures must be added to the acknowledgment:
- A description of the goods or services provided
- A good faith estimate of the value of the goods or services
- A statement that informs the donor of the deduction limitations. Deductions are limited to the excess of the contribution over the value of the goods or services that were provided.
It is imperative to note that responsibility for the acknowledgment shifts from the donor to the donee in a quid pro quo transaction. A penalty of $10 per contribution, with a limit of $5,000 per event, can be incurred by an organization that does not provide acknowledgment s for quid pro quo transactions.
Many nonprofits provide blank pledge cards to donors, asking the donor to fill out certain key information such as the amount donated. In August 2018, the IRS issued regulations stating that these blank pledge cards are not enough to be considered a written acknowledgment for cash, check, or other monetary gifts.
Nonprofit organizations need to be aware of these reporting standards so that they can be compliant with the IRS and supply their donors with the information that they will need to take an accurate deduction.
If you have any questions about the information outlined above or are looking for assistance with a nonprofit-related issue, Klatzkin can help. For additional information, please call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.